Lafarge Needs More Solid Demand



Saturday August 14, 2010


LOCAL cement players have been hit by lacklustre demand and rising costs in the first half of the year, and Lafarge Malayan Cement Bhd is no exception. The company saw its earnings for the first quarter ended March falling 47.4% to RM48.1mil versus RM91.4mil in the same quarter last year.


According to president and chief executive officer Bi Yong Chungunco, the main areas of concern for the company are still domestic market demand, thinner export margins (given the weaker US dollar and lower prices) as well as the possibility of fuel cost increases going forward.


“Cement demand growth is beyond our control. It hinges on construction activities and how fast infrastructure projects are implemented,” she tells StarBizWeek.


On the export front, cement demand between January and June was also weak, pushing world market prices below the US$40 per tonne level, resulting in thinner margins. Currently, about 70% of Lafarge Malayan Cement’s production is locally consumed, while the remaining 30% are exported to markets such as Indonesia, Sri Lanka and Bangladesh.


Export volume, however, is expected to be diverted to meet growth in domestic demand going forward, when more infrastructure projects take off.


Rising production costs is also another worry for the company. The benchmark Newcastle coal prices have risen about 40% year-on-year in the first half of the year at US$98 per tonne. There could be further cost pressures looming ahead in the form of higher electricity as well as diesel cost – should the Government press ahead with its plans to gradually remove subsidies.


Nevertheless, it is not all doom and gloom for the cement player and the industry. Chungunco is more optimistic about the outlook for the second half of the year, given the positive newsflow on the implementation of ongoing and new infrastructure projects. Some of these projects include the Second Penang Bridge, the double-track railway project and the low-cost carrier terminal at the KL International Airport.


“We believe the economic fundamentals are improving following the financial crisis. The Tenth Malaysia Plan (10MP) creates significant opportunities for cement companies, and as the market leader with a strong brand, we are well positioned to capture our fair share,” Chungunco says.


She adds that the property sector market fundamentals are also improving against a backdrop of steady gross domestic product growth.


To combat rising costs, Chungunco says the company will continue to increase the usage of alternative fuels, improve plant performance (which helps lower fuel and power consumption) and other cost-reduction measures.


“To protect our market position, we will have to make sure that we continue to innovate and provide our customers with the best quality products and services,” she says.


Analysts seem to echo Chungunco’s optimism about the company’s prospects. AmResearch expects Lafarge Malayan Cement’s sequential earnings momentum to improve from the second quarter ended June. This is due to the gradual improvement in cement demand from the resumption and commencement of select cornerstone projects under the 10MP and as the construction of new properties sold last year gathers momentum. Another reason is that export prices could be heading north with a tentative rebound in cement orders from key export markets. In addition, the company’s earnings will not be affected by a one-off repair and maintenance cost incurred in the first quarter.


Affin Investment Bank continues to like the stock as it believes the hike in domestic selling prices will more than offset rising coal prices and the lower export prices. Cement makers raised the gross average selling price of cement by about 9% to RM300 per tonne on May 1.


“Despite rising coal prices in the past, the group has consistently managed to maintain earnings before interest, taxation, depreciation and amortisation margin at the high teen level.


“Being the largest cement producer locally with 42% market share, we believe Lafarge Malayan Cement is one of the main beneficiaries in the building materials sector in a pick-up in construction activities,” it notes.


There has also been much speculation that the company may be distributing more cash to shareholders after it declared an interim single-tier dividend per share of 8 sen during the release of its first-quarter results in May.


Chungunco says Lafarge Malayan Cement does not have a stated dividend policy but its track record shows that its dividend payout ratio has averaged 70% to 80% of net profit in the past three years. “The quantum of dividend payout will take into consideration various factors such as earnings, cash flows, capital structure and future investment needs,” she says.


Nevertheless, AmResearch sees the declared interim single-tier dividend as a pre-emptive move by the company towards making quarterly dividend payments.


“With no immediate plans for capacity expansion, we see no reason why the group would resist distributing more cash to its shareholders on a quarterly basis – implying further upside to its gross yields of 5% to 6%,” it notes. Lafarge Malayan Cement had a healthy net cash position of RM160.2mil as at March 31.


On parent company Lafarge SA’s divestment of a 11.2% stake in Lafarge Malayan Cement, Chungunco says the Malaysian operations remain a part of the Lafarge group’s strategy to focus on emerging markets, especially in the cement business. “Lafarge has a large presence in Asia and Malaysia certainly fits in this strategy. The intentions of Lafarge regarding its stake in Lafarge Malayan Cement remains unaffected after the sell-down,” she says.


Lafarge will receive net proceeds of 141 million euro (RM565mil) from the sale by way of a placement. Lafarge keeps management control of the Malaysian activities and remains the majority shareholder with a 51% controlling shareholding in Lafarge Malayan Cement via its subsidiaries, Lafarge Cement UK plc and Associated International Cement Ltd. This is part of Lafarge SA’s global divestment programme to reduce its debts.